Anticipated Acquisition by Govia Thameslink Railway Limited of Thameslink, Southern and Great Northern Rail Franchise
Total Page:16
File Type:pdf, Size:1020Kb
Anticipated acquisition by Govia Thameslink Railway Limited of Thameslink, Southern and Great Northern Rail Franchise ME/6470-14 The CMA’s decision on reference under section 33(1) given on 11 September 2014. Full text of the decision published on 7 November 2014. Please note that the square brackets indicate figures or text which have been deleted or replaced in ranges at the request of the parties for reasons of commercial confidentiality. Summary 1. Govia Limited (Govia) is a joint venture between Go-Ahead Holding Limited and Keolis (UK) Limited (together with their group companies referred to as ‘the Parties’), which are both operators of public transport services in the UK. It is the parent company of Govia Thameslink Railway Limited (GTRL), an operating company incorporated to bid for and operate the Thameslink, Southern and Great Northern Rail Franchise (TSGN or the Franchise). 2. TSGN comprises two existing passenger rail franchises and parts of a third, which together will form the TSGN franchise. TSGN covers routes across Bedfordshire, Cambridgeshire, Greater London, Hampshire, Hertfordshire, Kent, Norfolk, Surrey and East and West Sussex. The Department for Transport (DfT) awarded the Franchise to GTRL on 23 May 2014. The existing Thameslink and Great Northern and Southern franchises carry a combined 273 million passenger journeys per year, employ around 6,500 people and generate annual passenger revenues of GBP 1.3 billion. 3. The Competition and Markets Authority (CMA) has assessed the Franchise under the merger control provisions of the Enterprise Act. This Franchise qualifies for investigation under those provisions since GTRL will acquire control of the Franchise by virtue of section 66(3) of the Railways Act 1993 and the UK revenues of the Franchise exceed £70 million. The CMA therefore considers that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation pursuant to section 23(2) of the Enterprise Act (the Act). 1 4. The parties overlap in the provision of public passenger transport services, ie bus (Go-Ahead) and rail (Govia and the Franchise). The CMA has considered competition on a flow-by-flow basis on those flows where the parties overlap. 5. The TSGN franchise agreement is a management contract in which the operator manages the delivery of rail services on the Franchise network on behalf of the DfT. Under this contract, the DfT takes almost all the rail fare revenues and the operator earns a management fee. The contract imposes significant constraints on the operator’s freedom to determine the commercial parameters of the Franchise, such as ticket prices. This is different from standard rail franchise awards where greater commercial freedom is afforded to the operator. 6. The CMA has considered whether the Merger could lead to an increase in prices or worsening of services on either the overlapping non-Franchise services already operated by the Parties (since customers lost as a result would switch to the Franchise) or on the Franchise (since lost customers would switch to Govia’s other services). In each case the CMA has consid- ered whether the Parties have the incentive and ability to increase prices or degrade services. The CMA considers that while the Parties may in principle have the ability to increase prices or degrade services on some of their overlapping non-Franchise services, it will have very limited incentive to do so since it will make little, if any, additional revenue from customers switching to the Franchise as a result. The CMA therefore believes that there is little or no incentive for the Parties’ to worsen the services or prices of their overlapping non-Franchise services. 7. Since the Parties would only lose minimal revenue in losing passengers on the TSGN Franchise, they may have an incentive to attract customers away from the Franchise in the hope of capturing them on their competing services. However, the CMA considers that Govia is prevented from increasing prices on the Franchise by the contractual obligations under the TSGN franchise agreement and DfT involvement and monitoring mechanisms. In addition, Govia is subject to particularly strict quality controls which substantially limit Govia’s ability to degrade the service, as well as a financial penalty and incentive structure linked to quality targets. 8. The CMA considers that these constraints, taken together, are sufficient to ensure that no realistic prospect of a substantial lessening of competition will arise as a result of the Merger. 9. This merger will therefore not be referred under section 33(1) of the Act. 2 Assessment Parties 10. GTRL is a train operating company incorporated for the purpose of bidding for and operating the TSGN franchise. GTRL is a wholly owned subsidiary of Govia. 11. Govia holds, through its subsidiary train operating companies (TOCs), the current contracts to run the Southern,1 Southeastern,2 and London Midland3 rail franchises. Govia is a joint venture (JV) between 65% shareholder Go- Ahead and 35% shareholder Keolis. Under the relevant shareholders agreement Go-Ahead may [] and Keolis may []. [] 12. Go-Ahead is a UK public transport operator. It had UK turnover in the year ending June 2013 of approximately £2.6 billion. 13. Keolis is an international operator of passenger transport services, ultimately owned by SNCF, the French state railway company. Its UK turnover in the year ending December 2013 was £[], and its worldwide turnover was £4 billion.4 In the UK, as well as its shareholding in Govia, Keolis has a 45% shareholding in FirstKeolis which currently runs the TransPennine Express rail franchise in northern England. It also has a 70% shareholding in a JV with Amey that was recently awarded the contract to operate the Docklands Light Railway. 14. The TSGN Franchise covers routes across Bedfordshire, Cambridgeshire, Greater London, Hampshire, Hertfordshire, Kent, Norfolk, Surrey and East and West Sussex. The DfT is the franchising authority for the Franchise. Under the TSGN Franchise Agreement, GTRL acquires the right to operate certain passenger rail services, specifically: (a) Thameslink and Great Northern – currently owned and operated by First Capital Connect Limited (operated as FCC). These services will transfer to the TSGN Franchise on 14 September 2014. 1 Govia has operated the Southern franchise since 20 September 2009 through its TOC Southern Railway Limited (and from 2001 through its TOC New Southern Railway Limited). The Southern franchise will end and transfer to the TSGN franchise on 26 July 2015. 2 Govia has operated the Southeastern (or Integrated Kent) franchise since 1 April 2006 through its TOC London and South Eastern Railway Limited. The Southeastern franchise is due to be re-franchised in 2018, and some of its routes will transfer to the TSGN franchise in December 2014 and January 2018. 3 Govia has operated the London Midland franchise since 11 November 2007 through its TOC London and Birmingham Railway Limited. The London Midland franchise is due to be re-franchised in 2017. 4 €[] UK turnover, and €4,920.7 million worldwide turnover. 3 (b) Southern (including Gatwick Express) – currently owned and operated by Southern Railway Limited, a wholly owned subsidiary of Govia. These services will transfer to the TSGN Franchise on 26 July 2015. (c) Parts of Southeastern – currently owned and operated by London and South Eastern Railway Limited, a wholly owned subsidiary of Govia. Parts of the Southeastern services will transfer to the TSGN Franchise on 21 December 2014 and 2 January 2018. Transaction 15. On 23 May 2014 the DfT announced that GTRL was the successful bidder for the TSGN rail franchise. On 11 June 2014 (after a statutory standstill period), the Franchise Agreement between the Secretary of State for Transport and GTRL was executed, confirming the award of the TSGN franchise to GTRL. The Franchise will commence on 14 September 2014 and has been awarded for an initial period of seven years, ending on 19 September 2021. 16. The rail services that are being transferred to the Franchise have existing turnover and goodwill and GTRL will acquire the assets, staff, rights and liabilities necessary to operate the TSGN Franchise. The existing Thameslink and Great Northern and Southern franchises carry a combined 273 million passenger journeys per year, employ around 6,500 people and generate annual passenger revenues of GBP 1.3 billion. Jurisdiction 17. The award of a rail franchise constitutes an acquisition of control of an enterprise by virtue of section 66(3) of the Railways Act 1993. Govia and the Franchise will therefore cease to be distinct. 18. Govia and its TOCs (including GTRL) are jointly controlled by Go-Ahead and Keolis. Under the relevant shareholders’ agreement, each of []. Go-Ahead and Keolis have therefore gained joint control, through Govia, of TSGN. 19. Therefore, as a result of the Merger, the enterprises of Govia and the TSGN Franchise will cease to be distinct. The UK turnover of the TSGN Franchise exceeds £70 million, so the turnover test in section 23(1)(b) of the Act is satisfied. The CMA therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation. 20. The Merger meets the thresholds under Council Regulation (EC) 139/2004 (the EC Merger Regulation) for review by the EU Commission (the 4 Commission). The parties submitted a reasoned submission to the Commission on 10 July 2014 requesting pre-notification referral to the CMA under Article 4(4) of the EC Merger Regulation. The CMA informed the Commission that it agreed with the referral request and considered the Merger capable of being reviewed in the United Kingdom under the Act.